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Unexpected Inflation and Redistribution of Wealth in Canada

Cesaire Meh and Yaz Terajima

Bank of Canada Review, 2009, vol. 2009, issue Spring, 45-52

Abstract: One of the most important arguments in favour of price stability is that unexpected inflation generates changes in the distribution of income and wealth among different economic agents. These redistributions occur because many loans are specified in fixed dollar terms and unexpected inflation redistributes wealth from creditors to debtors by reducing the real value of nominal assets and liabilities. This article quantifies the redistributional effects of unexpected inflation in Canada, providing comprehensive evidence of the nominal assets and liabilities of various economic sectors and household groups. A key finding is that the redistributional effects of unexpected inflation are large even with episodes of low inflation. The main winners are young, middle-income households who are major holders of fixed-rate mortgage debt and the government--inflation reduces the real burden of their debt. The losers are high-income households and middle-aged, middle-income households that hold long-term bonds and non-indexed pension wealth.

Date: 2009
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Handle: RePEc:bca:bcarev:v:2009:y:2009:i:spring09:p:45-52